Incoterms and Brexit

Incoterms are often used to allocate risks relating to the delivery of goods between seller and buyer where the goods will cross international borders. Incoterms have been widely used for trade within the EU, though the provisions relating to customs and border clearance formalities have had little relevance due to the EU customs union and single market. That will change once Brexit has occurred. When the UK is no longer a member of the EU, parties to contracts will have to pay much closer attention to the practical and commercial implications of the Incoterms that they select.

Supplier’s Area of particular risk? Supplier’s minimum What have you specified maximum obligations as the point(s) at which risk obligations and responsibility pass?

EXW FCA CPT CIP DAT DAP DDP Ex Works Free Carriage Carriage Delivered Delivered Delivered Carrier Paid To and At At Place Duty Paid Insurance Terminal Paid To

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Incoterms allocate between seller and requirements, or of continuing to use Incoterms that Following Brexit, those costs might include not buyer specific risks relating to the delivery have a significantly different risk profile once Brexit only tariffs but also any costs associated with other of goods. Crucially, the Incoterms are not a has occurred. This is particularly true of Incoterms regulatory and border clearance procedures. that allocate responsibility for customs and other complete contract of sale. For example, they border clearance issues, such as import or export There may be particular potential for misunderstanding do not address questions such as the price or licences. When Brexit occurs, the UK ceases to be a where the parties select one of the newer (2010) method of payment or the consequences of member of the European Union, its single market and Incoterms. Delivered at Terminal (DAT) and Delivered breach. Consequently, Incoterms are usually its customs union. The Taxation (Cross Border Trade) at Place (DAP) both require the parties to specify the Act 2018 provides the legislative basis for a separate place of delivery. In DAT delivery occurs when goods incorporated by reference into the contract, are placed at the buyer’s disposal, unloaded from the which may itself be made up of several UK customs and VAT regime. The UK will also operate separate (though parallel) systems to work alongside arriving vehicle. In DAP, delivery occurs when goods documents. In practice, this could mean that EU regulatory regimes such as REACH. Customs and are ready for unloading. Selection of Incoterms by Incoterms are incorporated by a reference border clearance therefore becomes a live commercial incorporating the relevant three letter code is not in a Framework Agreement, or in Terms and issue for trade between the UK and the EU27. enough. The allocation of risk depends on precise Conditions, or in ancillary documents such as a specification of the place at which delivery is to be Incoterms are often used for trade within the European made, and that includes the question of whether quotation or order form. Union (EU) and European Economic Area (EEA). delivery occurs before or after clearance of import Incorporation is usually effected by referring to the Currently, when used in that context, Incoterms relating formalities. to compliance with export or import formalities are not three letter code that identifies the relevant Incoterms. In the following table, we set out the key features of the In some cases, it is possible that incorporation could applicable. Once Brexit has occurred, those provisions become directly relevant, and commercially significant. 11 Incoterms, focusing on their allocation of responsibility be the result of a course of conduct, perhaps requiring for export and import clearance. Ensuring that you investigation of the parties’ correspondence and Responsibility at either end of the Incoterms “spectrum” select and incorporate the appropriate Incoterms will be documentation over a lengthy period. In either case, is clear. Where goods are to be supplied Ex Works an essential first step towards Brexit resilience. Having it can be difficult to spot which Incoterms have been (EXW) the seller’s obligations are discharged when selected Incoterms, it will then be necessary to ensure selected, and therefore to work out how key areas of goods are placed at the buyer’s disposal at the seller’s that you address all relevant points of detail to establish responsibility have been allocated between the parties. premises or other named place. From there, the buyer precisely when, and where, responsibility passes Brexit significantly increases the commercial risks assumes responsibility for all costs relating to export from seller to buyer. As with any contract, if risks are that might flow from inadvertently basing a supply from the seller’s and import into the buyer’s jurisdiction. inaccurately identified or inappropriately allocated, the arrangement on Incoterms that do not meet the parties’ By contrast, where goods are to be supplied Delivered price must be wrong. Duty Paid (DDP) the seller takes on all those costs.

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Incoterm Features Brexit issues

EXW—Ex Works: the seller ‘delivers’ when he or she places the goods Minimum liability for seller/supplier. Buyer is responsible at the disposal of the buyer at the seller’s premises or both for export and import clearance. The seller has an another named place. The goods will not have been obligation to provide only such assistance as the buyer cleared for export and not loaded onto any collecting may require to effect export. The seller is not obliged vehicle. Under Ex-Works the seller has no obligation to to organise export clearance. Buyers are advised not load the goods. to use EXW if they cannot directly or indirectly obtain export clearance.

FCA—Free Carrier: the seller delivers the goods, cleared for export, to the Seller must normally obtain at its own risk and expense carrier nominated by the buyer at the named place. It any export licence or other official authorisation and should be noted that the chosen place of delivery has carry out all customs formalities for the export of the an impact on the obligations of loading and unloading goods. Buyer must obtain at its own risk and expense the goods at that place. If delivery occurs at the seller’s any import licence or other official authorisation and premises, the seller is responsible for loading. If delivery carry out all customs formalities for the import of the occurs at any other place, the seller is not responsible goods and their transport through any country. for unloading.

CPT—Carriage Paid To: the seller delivers the goods to the carrier nominated Seller must normally obtain at its own risk and expense by him or her but the seller must, in addition, pay the any export licence or other official authorisation and cost of carriage necessary to deliver the goods to the carry out all customs formalities for the export of the named destination. goods, and for their transport through any country prior to delivery. Buyer must obtain at its own risk and expense any import licence or other official authorisation and carry out all customs formalities for the import of the goods and their transport through any country. womblebonddickinson.com Incoterms and Brexit | 1 November 2018 3 Rules for any mode or modes of transport

Incoterm Features Brexit issues

CIP—Carriage and Insurance Paid To: the seller delivers the goods to the carrier nominated Seller must normally obtain at its own risk and expense by them but the seller must in addition pay the cost of any export licence or other official authorisation and carriage necessary to deliver the goods to the named carry out all customs formalities necessary for the destination and also pay the necessary insurance. Here export of goods and for their transport through any the seller is obliged to provide only minimum coverage, country prior to delivery. It is up to the buyer at its own i.e. cover for loss or damage between the point of risk and expense to obtain any import licence or other departure and the destination stipulated. official authorisation and to carry out customs formalities for the import of the goods and for their transport through any country.

DAT (new, 2010)—Delivered At Terminal: the seller is considered to have delivered when the Seller must normally obtain at its own risk and expense goods, once unloaded from the arriving means of any export licence or other official authorisation and transport, are placed at the disposal of the buyer at carry out all customs formalities necessary for the a named terminal within the named port or place of export of goods and for their transport through any destination. Terminal in this case includes any place, country prior to delivery. It is up to the buyer at its own whether covered or not, such as a quay, warehouse, risk and expense to obtain any import licence or other container yard or road, rail or air cargo terminal. Under official authorisation and to carry out customs formalities this term the seller must bear all costs and risks in for the import of the goods. bringing the goods to and unloading them at the terminal at the named port of destination. In addition to these obligations, the seller must also clear the goods for export under what is generally referred to as ‘Export Clearances’, where applicable. However, the seller has no obligation either to clear the goods for import or to pay any import duty or carry out any import customs formalities.

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Incoterm Features Brexit issues

DAP (new, 2010)—Delivered At Place: the seller is considered to have delivered when the Seller must normally obtain at its own risk and expense goods are placed at the disposal of the buyer on the any export licence or other official authorisation and arriving means of transport ready for unloading at the carry out all customs formalities necessary for the named place of destination. The critical part of this new export of goods and for their transport through any Incoterm is that all parties under what circumstances country prior to delivery. It is up to the buyer at its own must clearly specify as clearly as possible the point risk and expense to obtain any import licence or other within the agreed place of destination as the risks to official authorisation and to carry out customs formalities that point are the account of the seller. In this regard, for the import of the goods. it is also very important to note that since the seller under DAP is responsible for procuring the contract of carriage he or she has to make sure that he or she procures the contracts of carriage that matches and conform precisely to the buyers choice.

DDP—Delivered Duty Paid: the seller delivers the goods to the buyer, cleared for Maximum liability for seller/supplier. Seller must normally import and not unloaded from any arriving means of obtain at its own risk and expense any export licence transport at the named place of destination. Under or other official authorisation and carry out all customs DDP there is maximum obligation to the seller and, on formalities necessary for the export of goods and for the other hand, this option allows minimum obligation their transport through any country prior to delivery and on the buyer. The only responsibility of the buyer for their import. under DDP is to offload at the delivery place. General guidance as a seller is to never contract under DDP. If the seller is unable to directly or indirectly obtain import clearances DAP is recommended. Any VAT or other taxes payable upon import are for the seller’s account unless expressly agreed otherwise in the sales contract.

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Incoterm Features Brexit issues

FAS—Free Alongside Ship: the seller is considered to have delivered when the Seller must normally obtain at its own risk and expense goods are placed alongside the vessel at the named any export licence or other official authorisation port of shipment. This means that the buyer has to bear and carry out all customs formalities necessary for all costs and risks of loss of or damage to the goods the export of goods. Buyer must obtain at its own from that moment. The seller should select a point other risk and expense any import licence or other official than physically ‘alongside the ship’ it is essential that authorisation and carry out all customs formalities for under FAS the buyer indicates a loading point at the the import of the goods and for their transport through named port of shipment and give the seller sufficient any country. notice of the vessel’s name, loading point and, where necessary, selected delivery time within the agreed period. In the event that the buyer fails to give these details, the seller may use his discretion to select a point that best suits his purposes; but, in any case, that point should be alongside the ship. In the event that the buyer has given an indication of the loading point but later wishes to change these instructions, the seller is not obliged to cover the cost of transferring the goods to a new loading point, provided that the seller has acted in line with the buyer’s first instruction.

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Incoterm Features Brexit issues

FOB—Free On Board: the seller is considered to have delivered when the Seller must normally obtain at its own risk and expense goods are placed on board the ship at the named port any export licence or other official authorisation of shipment. Most will no longer use FOB/CFR/CIF and carry out all customs formalities necessary for for container-loaded goods. This is because, where the export of goods. Buyer must obtain at its own goods in a container are sold FOB, the container is risk and expense any import licence or other official typically handed over by the seller at a container yard authorisation and carry out all customs formalities for or warehouse, which is in practice the appropriate the import of the goods and for their transport through delivery point. Under FOB, the seller bears all the costs, any country. risks of loss of and damage to the goods until they are delivered by being placed on board the vessel, it is recommended that for all containerised goods, buyers should opt for Incoterms such as FCA, CPT or CIP.

CFR—Cost and Freight: the seller is considered to have delivered when the Seller must normally obtain at its own risk and expense goods are placed on board the ship in the port of any export licence or other official authorisation shipment. The seller must, in addition, pay the cost of and carry out all customs formalities necessary for carriage necessary to bring the goods to the named the export of goods. Buyer must obtain at its own destination. Although under this Incoterm the issue risk and expense any import licence or other official of insurance is silent, it is assumed that the buyer authorisation and carry out all customs formalities for purchases his or her own insurance. the import of the goods and for their transport through any country.

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Incoterm Features Brexit issues

CIF—Cost Insurance and Freight: the seller is considered to have delivered when the Seller must normally obtain at its own risk and expense goods are placed on board the ship in the port of any export licence or other official authorisation shipment and also pays the necessary freight and and carry out all customs formalities necessary for insurance (CIF). It is important to note that contracts the export of goods. Buyer must obtain at its own placed CIF relieve the buyer of the task of making risk and expense any import licence or other official insurance arrangements. However, the disadvantages authorisation and carry out all customs formalities for are many: under CIF the supplier is obliged only to the import of the goods and for their transport through buy the cheapest insurance coverage, with minimal any country. coverage and conditions that may make a claim difficult.

For more information please contact:

Paula Dillon Paul Harvey Nick Barwood Malcolm Dowden Partner Head of Knowledge Partner, Legal Director (PDL) T: +44 (0)113 290 4454 and Legal Training Legal Solutions Centre Commercial E: [email protected] T: +44 (0)1752 67 7540 T: +44 (0)2380 20 8420 T: +44 (0)2380 20 8428 E: [email protected] E: [email protected] E: [email protected]

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